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Hbc 2222: Monetary Theory And Practice Question Paper
Hbc 2222: Monetary Theory And Practice
Course:Bachelor Of Commerce
Institution: Dedan Kimathi University Of Technology question papers
Exam Year:2011
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DEDAN KIMATHI UNIVERSITY OF TECHNOLOGY UNIVERSITY EXAMINATIONS 2010/2011 YEAR III SEMESTER I EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE HBC 2222: MONETARY THEORY AND PRACTICE DATE: 14TH APRIL 2011 TIME: 11.00AM – 1.00PM
INSTRUCTIONS
1. Answer QUESTION ONE and any other two questions.
2. Be neat, clear and orderly.
QUESTION ONE –COMPULSORY a) i. Discuss the main disadvantages of an economy in which incomes are paid in kind and transactions are carried out by barter. (5 marks) ii. Define “money supply” and indicate the meaning of M3 as used in Kenya today. (2 marks) b) i. Distinguish between nominal and real interest rate and indicate their importance. (2 marks) ii. How do interest rates influence the economic decisions of individuals, businesses and governments in a country? (3 marks) c) i. Explain the historical development of money and the problems encountered at each stage of its development. (6 marks) ii. Explain the sense in which commercial banks are said to create money and what sets the limit to the amount that they can create. (5 marks) d) i. Explain the Cambridge version of the quantity theory of money and indicate its importance. (5 marks) ii. In an economy 100 transactions with a market value of Shs 600 were undertaken. The money supply was only Shs 200. Explain how this was possible. (2 marks) (Total 30 marks)
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QUESTION TWO a) “Inflation is always and everywhere a monetary phenomenon” – Milton Fredman, 2009, Discuss (8 marks) b) Discuss the effects of inflation on the economy. (8 marks) c) Explain the macroeconomic policies for controlling high that inflation rates. (4 marks) (Total 20 marks) QUESTION THREE a) Using the modern quantity theory of money associated with Friedman, explain the effect of an increase in the money supply on prices and output in an economy. (10 marks) b) Define the term “transmission mechanism” and explain how an increase in the money supply is transmitted into real expenditure decisions and hence to national income under the Keynesian theory. (10 marks) (Total 20 marks) QUESTION FOUR a) With the aid of diagrams, explain the Keynesian liquidity preference theory of interest rates distinguishing carefully between the motives for holding money. (12 marks) b) Define the term “transmission mechanism” and explain how an increase in the money supply is transmitted to real expenditure decisions and hence to national income. (8 marks) Total 20 marks) QUESTION FIVE You are given the following information about the commodity and money markets for a closed economy without the government: Commodity Market I = 20 – 2r, S = 1/2Y, where I = Investment, S = savings and r = interest rate. Money Market MDT = 1/2Y, MDS = 700 – r, MS = 702. Where MDT = Transactions and Precautionary demand for money MDS = Speculative demand for money, and Ms = Money Supply.
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Required:
i) Define IS and LM curves and explain their slopes. (4 marks)
ii) Derive the IS and LM functions for this economy (4 marks)
iii) What is the equilibrium income and the rate of interest for the economy?
(4 marks)
iv) Compute the equilibrium level of consumption, savings and investment and
comment on your results. (4 marks)
v) Calculate the effect on the level of income and the rate of interest of an
autonomous fall in investment of 10 and comment on your results. (4 marks) (Total 20 marks)
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